It is fairly common for a business owner to want to exit their business rapidly after completing a sale. Most owners are accustomed to being the boss and aren’t sure how they will feel after the new owner has stepped in to run the business, or they are simply ready to move on. However, one of the biggest buyer fears is that performance will decline after ownership is transferred because of the absence of the former owner's knowledge, experience, and relationships. For a business to be attractive, buyers will need to feel confident that there can be a smooth transition with little or no business interruption, and if problems do arise that they will be able to depend on the seller for help and advice to resolve the issues.

The length of time for training and transition will vary from one business to another, and the seller’s compensation for such will depend on the nature of the business and the structure of the sale. Generally, the less dependent that a business is on the owner’s knowledge and relationships, the shorter the training and transition period. Conversely, the more dependent a business is on an owner’s knowledge and relationships, the longer the training and transition period. For most business sales, Codiligent is able to negotiate a training and transition period of 2-4 weeks as part of the agreed upon sale price and structure, with promised seller availability for limited paid consulting hours for an additional 1-11 months. With businesses that have a high degree of dependence on the seller’s specialized knowledge or relationships, training and transition could last as long as 2-3 years.

With any sale, a business will attract more buyer interest if an owner is willing to be available for a longer transition period. Accommodating a longer-than-typical transition period can be accomplished using an agreed upon employment contract or by making paid consulting hours available. While a buyer may not use consulting hours offered by a seller, the fact that they are available will lower a buyer’s perception of risk and provide greater confidence of success after the sale has closed.

If you are planning for a sale a few years in advance, you may want to ask yourself, “How dependent is the business on me? Are there important relationships that I have which may not transfer to a new owner? Do I have unique knowledge and skills that a buyer may not have? Are there things that I know that my employees don’t?” If the answer to any of these questions is “yes”, you may want to work on some changes to the business which could include:

Recording your knowledge in written form showing step-by-step instructions on how you address particular issues;

Training and educating employees to provide them with your knowledge;

Increasing employee involvement with clients, vendors, and consultants to shift your personal relationships to the business.

Making these changes will help minimize the amount of post-sale training and transition and will create a greater sense that the business’ performance isn’t dependent on you, which will lower the perception of risk, increase marketability, and ultimately increase the price you may receive.

Want some advice from someone who has recently been through the M&A process? Location Labs was recently acquired by antivirus company AVG for $220 million. The founder of Location Labs, Tasso Roumeliotis, shared some insights on issues to consider when pursuing a sale or merger of your company in an article on VentureBeat.com "The 5 things you can't forget when preparing for M&A".

I concur with all of his comments except for one: he says that your VP of Finance will need to be extremely good:strategically savvy, incredibly organized, and willing to work 100 hours a week for 3 to 4 months straight. That very well may be true for companies the size of Location Labs - particularly if they did not use an investment banker to help with the deal. However, Codiligent takes on smaller clients, usually under $20 million in annual revenue. So while we do hope that clients will be well organized and that the person dealing with assembling financial information will work hard, as the intermediary we usually play the role that Tasso describes of financial modeling, negotiations, term-setting, and other transaction aspects that fall under the financial category. In fact, some of our clients' key financial persons are not aware that the owner is selling the business until the end of the deal.

It is accurate that this financial role, which Codiligent primarily plays for its clients, is extremely time consuming. Many would-be business sellers mistakenly assume that their investment banker or business broker is simply matching up a buyer and seller, and does little else. If you are using a high-quality intermediary the work they do behind the scenes is substantial. That's not to say that there aren't plenty of business brokers and investment bankers that take short-cuts and don't do all that they should - but that's why it's important to select the right broker.

1. General Marketing / Negotiated Deal: This business sale model is when a business broker places ads on websites or does other types of general marketing in hopes of attracting strategic and financial buyers, who then call or email in response to ads. When a buyer is interested they will not move forward as part of an auction process with a deadline, but rather will submit a Letter of Intent (LOI) which will then be negotiated with the seller. This is most appropriate for businesses where it would be difficult to identify logical strategic buyers (usually more main-street type businesses - for example, a single-location restaurant or retail business).

2. Active Search / Negotiated Deal: Some businesses wouldn't likely be a good acquisition for a general buyer due to the specialized nature of the business. Other businesses with high confidentiality requirements may be so unique that it would be hard to create an accurate description of the business in an advertisement that wouldn't raise suspicions about the true identity of the business. Under such circumstances, general advertising may be inappropriate, and instead a business broker may conduct an Active Search for logical strategic buyers and for financial buyers with specific matching acquisition criteria. When using this business sale model there is not an auction with a deadline, rather buyers submit a LOI after they become comfortable with the business.

While the business broker strives to create competition for the business, the absence of an offer deadline may lower the probability of receiving multiple concurrent offers. Some business sellers assume that means this is not a good business sale model. However, many business buyers refuse to devote the time and energy necessary to participate in an auction, so a seller who is depending on an auction process could find that they don't receive ANY offers. An active search with a negotiated deal is more common for small and lower mid-market businesses than an auction.

3. General Marketing & Active Search / Negotiated Deal: This is the business sale model that Codiligent most often utilizes. It involves a combination of general marketing and an active search for logical strategic and financial buyers, culminating in a negotiated offer, rather than an auction process. The goal is to get multiple parties to move forward at roughly the same time to create competition but without the risk of having low participation in an auction. This business sale model will tend to be most productive in attracting a broader group of both financial and strategic buyers. While the broker will take great care to protect the confidentiality of the seller, if there is a reason why an unusually high level of confidentiality is required and the business is fairly unique and thus difficult to accurately describe without raising suspicions about its identity, this model may be uncomfortable for some sellers.

4. Active Search / Auction Process: This business sale model involves locating logical strategic buyers and financial buyers who have acquisition criteria that match the characteristics of the business, and then getting them to agree to participate in an auction where they are provided with information about the business and then are given a date by which they must submit their best offer. After receiving the bids the broker clarifies the deal terms and then helps the seller choose the one that best meets the seller's goals. This model can be effective for businesses for which a seller and their broker are confident there will be high demand (often because there are multiple parties who have previously made inquiries or let their interest be known, and there are other acquisitive industry buyers for whom the business would be an extremely good match).

For businesses that may not have as strong of demand, an auction can be problematic for the following reasons:

The timing may not be exactly right for the companies that would be ideal bidders (where even just one or two months later they would have the bandwidth to devote to an acquisition);

Some buyers refuse to participate in an auction because they are unwilling to devote the time and energy necessary to evaluate the business if they perceive themselves to be competing directly with multiple other buyers; and

Many of the best buyers are not anticipated by the seller and business broker - Axial Market suggests that 40%-45% of actual business buyers are not on a seller's top tier buyer list.

If you are working with a quality business broker or investment banker, they will help you determine which business sale model is best for meeting your exit objectives. If you are not already working with a business broker and would like to explore this further please contact Codiligent for a confidential consultation at: 888-324-5888.

Many business owners underestimate the nuances and complexity of exit planning. Unfortunately, this is often exacerbated by some professional advisors who strive to overly control the process or who want to be the sole representative of the business owner in assisting with the process. For example, a contract CFO, wealth manager, CPA, or attorney may be keenly interested in exit and transition planning and may have significant experience, formal education, attended seminars, and read books on the subject. However, I would argue that it would be the rare individual who will have expertise and skill in all areas necessary to help a business owner optimize their exit.

Rather, a business owner should be looking for advisors who play well with others. So, yes, an attorney plays a vital role in the exit process, but they aren't an accountant and may not possess some of the knowledge of a CPA. Likewise, while the attorney may be good at helping protect clients through appropriate legal documents, and the CPA may have invaluable advice on the tax implications of the deal structure, neither of these professionals may have the skill set that an investment banker or business broker has of analyzing, valuing, and packaging the business or of finding and screening the best buyer and negotiating a win-win deal. And what about planning for what a business owner will do after the sale? Is a business broker, investment banker, attorney, or CPA going to be the best person to provide advice on what type of assets you need to own to securely provide for your long-term financial needs and reach goals in the next chapter of your life? Or might a wealth manager be better equipped to provide this type of guidance?

How important is economic freedom? Are less free and more regulated people, as a whole, just as well off as those with more economic freedom? Are all types of economic organization equally good but with different pros and cons? Or does economic freedom truly lead to a higher quality life? Which countries' people have the lowest quality of life and what is their level of economic freedom? Do property rights really matter? Is a smaller or larger role for government better?

Check out the following 60-second video that provides a perspective on this topic. What do you think?